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Cash Advances or MCAs are financial products not to be confused with loans. An MCA is when a lender purchases a percentage of your future credit card sales. When you apply for an MCA, the lender will look at the credit card receipts of your business to determine if you can pay back funds based on your daily credit card sales. A merchant cash advance agreement with a lender means signing a contract that agrees to sell future receivables. The fees and their collection methods will be included in the contract. The contract typically states no fixed repayment date since the advance is only considered paid once the principle and predefined interest are fully collected. Some contracts will go into detail about the screening process the lender uses to determine eligibility.

How does an MCA work?

An MCA agreement between a lender and a business owner is typically based on several factors, including:

  • Advance amount: The advance amount is the lump sum you receive when MCA is approved. The funding amount is based on your business’s financial strength.
  • Payback amount The payback amount is the amount that the business owner must repay. It is calculated based on the amount funded plus fees, called a factor.
  • Holdback The holdback is an agreed-upon percentage of the daily credit card receipts withheld to pay back the MCA.

The amount you are eligible to advance will depend mostly on your average credit card sales. Depending on how much you need and how much the lender decides you are qualified for, the MCA can be as little as 50% of your monthly sales or up to 250% of your monthly sales. To repay the cash advance, a small percentage is calculated and is taken with each credit card sale over the repayment period. The agreed-upon percentage is called a “holdback.” The lender withholds that amount daily until the cash advance is paid back in full. The holdback is also referred to as the “retrieval rate,” it can be anywhere between 5% and 20% depending on the lender, the amount of your advance, your daily credit card sales, and the agreed repayment period. The advance amount will also determine the term or repayment period between 90 days and 18 months. You’ll repay the advance sooner if your business does well and receives more credit card transactions. And because repayment is based on a percentage, if your sales are low on a particular day, the amount taken from you is relative to your incoming cash flow.

Who Are MCAs Mainly Designed For? Who Uses Them? 

MCAs are typically for businesses needing quick capital to cover unexpected expenses. Business owners can use the advance for many things, such as purchasing materials for a large order, hiring new employees, preparing for a high-demand season, or buying new equipment. A merchant cash advance is an option for relatively new businesses that don’t yet qualify for a traditional bank loan. It’s also ideal for small business that needs more assets to provide as collateral. And if you are seeking short-term financing, MCAs offer that along with flexible repayment terms. MCAs are for any business, regardless of industry and size, with a consistent flow of credit card transactions. It’s also one of the few options for any company with less-than-perfect credit. Credit score requirements will vary from lender to lender. Some firms will look at credit scores, while others only care about your current capacity to repay the advance. Because the lender will take a percentage of credit card sales, the business owner only needs to assure the lender that their daily credit card sales are steady enough to guarantee repayment. They can prove this by presenting credit card receipts from the last two or three months of business operations.

What Are the Requirements for MCAs? Am I Eligible? 

Every lender is different. One lender might require that you maintain at least $2,500 in monthly credit card transactions, while another might require $5,000. While most will require that you’ve been in business for at least a year, another might consider you for advance with less than six months in business. Some lenders may even require you to make five or more monthly deposits. Some may need less. However, there are lenders out there who are more concerned about your credit score rather than your monthly credit card transactions. Lending firms generally want to see a credit score of at least 500 – 600. However, some lenders are willing to offer advances to businesses with lower credit scores. Unfortunately, in these cases, the rates and fees for these MCAs are much higher than the typical percentage. Sometimes, they are higher by 5% to 10% of the regular retrieval rates.